What is the difference between tax expense and taxes paid?

Tax expense is the charge in the profit and loss account: the tax on the year's accounting profit, including deferred tax that will be paid, or recovered, in other years. Taxes paid is the cash that went to the tax authority during the year, which can include last year's balance and instalments towards this year's liability. The two match only by coincidence. A lender uses the cash figure for this year's cover and reads the charge for where the cash is heading.

Where do you find cash taxes paid?

In a cash flow statement prepared under the international standard, income taxes paid appear as a separate line, usually in operating activities. Where there is no cash flow statement, take the current tax charge, add the tax payable at the start of the year and deduct the tax payable at the end, treating any refund due as a negative payable. Tax returns and the tax authority's account statements confirm the result.

What is a cash tax rate?

It is tax paid in a period divided by profit before tax for the same period. Set beside the effective tax rate, the charge divided by profit before tax, it shows how far the accounts and the cash have drifted apart. A cash rate persistently below the effective rate points to deferred tax building up, through losses or fast tax depreciation; a cash rate above it often means a previous year's higher profits being paid for now.

Should DSCR use tax paid or the tax charge?

For a historical ratio, tax paid, because the ratio is asking what cash was available for the bank, and the charge includes deferred tax that did not leave the business that year. For a forecast, the lender projects the tax that will be paid in each year under the instalment rules, which means modelling losses, tax depreciation and timing rather than applying a rate to profit. A facility agreement may define the covenant either way, so the definition is checked.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Cash Taxes: a Worked Example

The profit and loss account accrues the tax. The bank account pays it.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

A lender reading a cover ratio wants the tax that actually left the business, because that cash is no longer available to the bank. It is read from the tax-paid line of a cash flow statement, or rebuilt from the tax balances where there is none. It can sit well below the tax charge for years while tax losses are used up or tax depreciation runs ahead of the accounts, and above it when a strong year's tax falls due in a weaker one. The lender's work is to explain the gap between the two, and to judge whether the reason is about to end.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

PART OF Credit Analysis for Beginners

// 01 — WHY THE CHARGE AND THE CASH DIFFER

The tax charge in the profit and loss account is an accrual: tax on this year's accounting profit, made up of current tax and deferred tax. Tax paid is what went to Inland Revenue, the ATO or HMRC during the year. Three things separate them. Deferred tax: using losses carried forward, or claiming tax depreciation faster than the accounts depreciate, lowers the tax payable now while the charge reflects the full rate. Timing: tax is paid in instalments during and after the year, so the cash in any one year mixes two years' liabilities. And one-off items, such as a refund or a settled dispute, land in whatever year they are paid.

The instalment rules differ by market. A New Zealand company that pays provisional tax usually pays it in three instalments during the year, under the standard option based on last year's residual income tax plus 5%, and settles the balance as terminal tax after the year ends. An Australian company pays PAYG instalments during the year, quarterly for most and monthly for the largest. In the UK, a large company, above HMRC's profit threshold, usually pays four quarterly instalments from the seventh month of its accounting period, two of them after the year end; a very large company pays all four within the year, from the third month. Others pay nine months and a day after the year end.

// 02 — HOW A LENDER FINDS THE FIGURE

From a cash flow statement: income taxes paid, shown separately

From the accounts alone:

Tax paid = current tax charge

+ net tax payable at the start of the year

− net tax payable at the end of the year

Tax charge = current tax + deferred tax

Accounts under the international standard, adopted as NZ IAS 7 and AASB 107, disclose tax cash flows separately and normally classify them as operating. A small UK company under FRS 102 need not prepare a cash flow statement, and many special-purpose accounts in New Zealand and Australia have none, so the lender rebuilds tax paid from the current tax charge and the movement in the tax balances. In a group the lender also asks which company pays. In an Australian tax-consolidated group the head company is liable for the group's income tax, and a subsidiary's share may leave it through a funding arrangement rather than a tax line.

// 03 — THE EXAMPLE

A maker of precision optics for laboratory instruments, constructed for this page like every figure in it, has returned to profit after three loss-making years and carries US$6.0m of tax losses forward, recognised in its balance sheet as a deferred tax asset. The tax rate here is 25%, the example's own, taxable profit is taken to equal accounting profit, and tax is assumed to be paid in the year it arises, to keep the arithmetic plain. EBITDA is US$14.0m in both years, maintenance capex US$3.0m, and debt service US$7.0m: US$2.0m of interest and US$5.0m of principal. In US$m:

Profit before tax: 14.0 − 3.0 depreciation − 2.0 interest = 9.0

Tax charge at 25% = 2.25

current tax: (9.0 − 6.0 of losses) × 25% = 0.75

deferred tax: losses used, 6.0 × 25% = 1.50

This year, tax paid 0.75: (14.0 − 0.75 − 3.0) ÷ 7.0 = 10.25 ÷ 7.0 = 1.46×

Next year, tax paid 2.25: (14.0 − 2.25 − 3.0) ÷ 7.0 = 8.75 ÷ 7.0 = 1.25×

This year's cover is right for this year and wrong as a guide to the next. The losses are spent, the same earnings will pay three times the tax, and cover falls by about a fifth of a turn with nothing in the business changed. The tax charge, which stayed at 2.25, gave the better forward view; had the losses not been recognised as an asset, the charge too would have shown 0.75, and only the tax losses note would have warned of the step. When the cash actually rises depends on the instalment rules. Where instalments are set from last year's tax, as under New Zealand's standard option, the first fully taxed year is paid partly through instalments based on the low year and partly through a larger balance the year after, so the step can arrive later and steeper than the profit. The levels are the example's, not a norm.

// 04 — HOW IT DIFFERS FROM THE CHARGE AND THE RATE

The tax charge and the effective tax rate describe the accounting; tax paid describes the cash. Analysts read a cash tax rate, tax paid as a share of profit before tax, beside the effective rate, and a gap that persists has a reason worth finding. A capital-intensive business that keeps investing can pay less than its charge for many years, because each year's new tax depreciation offsets the reversal on older assets; that gap lasts as long as the investment does. A business using up losses has a gap with an end date, and the tax losses and deferred tax notes show roughly how long it has to run. A gap the other way, cash above the charge, can mean a strong year being paid for in a weaker one, or tax arrears being cleared.

DEFINED IN ONE PARAGRAPH → · LENDER'S FREE CASH FLOW → · TAX ARREARS →

// 05 — WHERE IT DECIDES A FILE

In a forecast, the lender's first tax question is when the business becomes a full taxpayer: losses running out, a period of accelerated tax depreciation ending, a change in group tax arrangements. That date belongs in the repayment profile, because a schedule sized on this year's tax paid can be too steep for the year after. The second question is timing within the year. In a seasonal business, a large instalment due in a thin month draws on the working capital line, and a 13-week cash flow shows it. The third arises on a sale of assets: tax on the gain is a cost of the sale, so a lender expecting proceeds to repay debt, as a mandatory prepayment does, reads the proceeds after the tax they will attract.

DEBT SERVICE COVER RATIO → · 13-WEEK CASH FLOW →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 107 Statement of Cash Flows (compiled, applicable from 1 January 2024), the Australian text of IAS 7 — paragraphs 35 and 36 — Requires cash flows from taxes on income to be disclosed separately and classified as operating unless they can be identified with investing or financing, and notes that tax cash flows may fall in a different period from the transactions behind them — sections 01 and 02.
Inland Revenue (New Zealand), Provisional tax: standard option — Sets standard-option instalments from the previous year's residual income tax plus 5% (or two years back plus 10%), paid in three instalments — sections 01 and 03.
HM Revenue & Customs, Pay your Corporation Tax bill, and Corporation Tax: paying in instalments (GOV.UK) — Sets the due date of nine months and one day after the accounting period for companies below the large-company threshold, and quarterly instalments above it, from month seven for large companies (two after the year end) and earlier for very large companies — section 01.

// QUESTIONS PEOPLE ASK

What is the difference between tax expense and taxes paid?: Tax expense is the charge in the profit and loss account: the tax on the year's accounting profit, including deferred tax that will be paid, or recovered, in other years. Taxes paid is the cash that went to the tax authority during the year, which can include last year's balance and instalments towards this year's liability. The two match only by coincidence. A lender uses the cash figure for this year's cover and reads the charge for where the cash is heading.
Where do you find cash taxes paid?: In a cash flow statement prepared under the international standard, income taxes paid appear as a separate line, usually in operating activities. Where there is no cash flow statement, take the current tax charge, add the tax payable at the start of the year and deduct the tax payable at the end, treating any refund due as a negative payable. Tax returns and the tax authority's account statements confirm the result.
What is a cash tax rate?: It is tax paid in a period divided by profit before tax for the same period. Set beside the effective tax rate, the charge divided by profit before tax, it shows how far the accounts and the cash have drifted apart. A cash rate persistently below the effective rate points to deferred tax building up, through losses or fast tax depreciation; a cash rate above it often means a previous year's higher profits being paid for now.
Should DSCR use tax paid or the tax charge?: For a historical ratio, tax paid, because the ratio is asking what cash was available for the bank, and the charge includes deferred tax that did not leave the business that year. For a forecast, the lender projects the tax that will be paid in each year under the instalment rules, which means modelling losses, tax depreciation and timing rather than applying a rate to profit. A facility agreement may define the covenant either way, so the definition is checked.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · CAPACITY

Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.

Is three times the same risk for both?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHCash taxes (tax paid) What are cash taxes, and why does a lender use tax paid rather than the tax charge?